Accounting equation

Accounting equation Definition

Basic accounting equation is the foundation for the whole double-entry book-keeping system. The equation is as follows:

Assets = Liabilites + Shareholders' Equity

It shows how assets were financed: either by borrowing money from someone else (liability) or by paying your own money (shareholder's equity). For example, a student buys a computer for $945. This student borrowed $500 from his best friend and saved another $445 from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445.